You may be spending your weekends at the beach or preparing for your upcoming vacation, but summer is a great time to organize your taxes.
Americans tend to scramble at the end of the year, or in the worst case, at the beginning of April, to prepare their taxes, find charity donation receipts or open retirement accounts; but tax planning is an ongoing process, experts say, which should be documented all year long. While it’s anything but fun to spend a July Sunday compiling receipts and shifting investments, it will help you save money in the long run.
“Everybody procrastinates, but people should just take a rainy day and organize their documents from January to June,” said David McKelvey, partner at accounting firm Friedman in New York. “They will save time at the end of the year.”
Here are four steps you can take to help prepare your 2014 taxes:
- Manage your taxable income. For 2014, the top income tax rate of 39.6 percent will apply to individuals with taxable income over $406,751, or $457,601 for joint filers. If you expect your 2014 income to be near that threshold, start thinking of ways to reduce your taxable income by deferring income, contributing to pre-tax investments including to a retirement account, or shifting income to family members in lower tax brackets by giving them income-producing investments. “You want to manage your bracket,” said McKelvey. “It can translate into real savings.”
High-income earners subject to the alternative minimum tax should also pay close attention to their taxable income and in some cases, they may want to accelerate income. As always, your accountant should offer concrete strategies.
- Generate investment losses. The stock market has had a strong run so far in 2014 and chances are, you’ve realized some gains. With the capital gains rate for taxpayers in the top bracket at 20 percent, you should keep track of how much capital gains you’ve realized or plan to realize, and consider selling some depreciated investments to generate losses and offset those gains. You can always repurchase these investments if you wait at least 31 days.
- Contribute to retirement. It will help reduce your taxable income, as mentioned above, in addition to help you plan for the future. You can contribute to traditional IRAs, which will be tax deductible. Pretax deferrals to employer-sponsored retirement plans such as 401(k)s also help save taxes. “You pay no tax as long as the funds are in the account, which reduces your taxes for years to come,” McKelvey said. “Plus, tax-deferred compounding can help your investments grow more quickly.”
- Plan for medical expenses. As of 2013, the threshold for deducting medical expenses increased from 7.5 percent of your adjusted gross income to 10 percent. You can deduct only expenses that exceed that floor. If they don’t, you can save by contributing to a tax-advantaged health care account such as a health savings account, HSA, or a flexible spending account, FSA. While contributions are pretax or tax-deductible and withdrawals are tax free, some rules and limits apply as to what types of medical expenses qualify. Another change for 2014 you can plan for now is the addition of a 3.8 percent Medicare tax, one of the main consequences of Obamacare for most taxpayers. That tax will kick in for married people making over $250,000.
“Tax planning can create a lot of anxiety,” McKelvey said. “The advantage of starting midyear is that you don’t have to rush.”
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